RBI Special Liquidity Facility for Mutual Funds – Would investors benefit from this facility?

RBI Special Liquidity Facility for Mutual Funds – Would investors benefit from this facility?

Last week Franklin India has wind-up 6 debt funds and said its investors cannot redeem funds now for a total of Rs 30,000+ Crores citing liquidity reasons. This created panic in the Indian mutual fund industry. RBI has announced now that it would open Rs 50,000 crores as a Special Liquidity Facility for Mutual Funds to help with redemption pressure. Is this just a tip of ice-berg? In this article we would provide details about the RBI special liquidity facility for mutual funds and would it really benefit mutual fund investors.

What happened to Franklin India Debt Funds?

Last week it was shocking to debt fund investors when every one heard Franklin India wind-up 6 debt mutual funds as there is severe redemption pressure and they are not able to honor such redemptions due to covid-19 pressure where they are not able to sell the debt papers. However, the hidden factor is that these funds invested in the low rated securities that has become illiquid now. These debt funds have invested in high credit risk securities which has become difficult to sell at this point of time. While the decision about closure of these funds at this juncture is correct, there was no preemptive measures taken by the fund manager. This is the cause of this panic in the mutual fund industry.

What is RBI Special liquidity facility for mutual funds (SLF-MF)?

Today it is Franklin India Mutual Funds and tomorrow it could have been another mutual fund AMC who would have dropped the ball and closed the debt funds in this covid-19 crisis and created some more panic in the debt fund industry. To support them, RBI has announced this special liquidity facility for mutual funds. This is how SLF MF would work.

1) RBI would not give these funds directly to mutual fund AMCs. RBI would release funds to be made available to banks. Banks have to approach RBI for this special purpose fund.

2) RBI would provide these loans at lower rates than the regular interest rates to banks.

3) Which ever Mutual Fund AMC is facing pressure on mutual fund redemption’s, they need to approach their bank to get funds on this

4) Mutual fund AMC can take up to 20% of AUM as loan.

5) Banks can either extend loan to that Mutual Fund AMC or undertaking outright purchase of repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and CoDs held by Mutual Funds. This refers that if mutual funds are not able to sell their debt securities or bonds in the open market, they can use this facility to meet redemption requests from investors.

RBI Special Liquidity Facility for Mutual Funds – Would investors benefit from this facility?

Currently there is pressure coming not only from debt funds, but also from equity mutual fund investors for redemptions. While in equity funds, AMC can sell the shares at a loss, in debt funds, selling bonds / commercial papers is difficult as there are no buyers. Hence this is a good move by RBI to offer such benefit. This special facility would ease mutual fund AMCs to take a loan and honor redemptions especially for debt fund investors.

But on the other hand, this is like pain killer. We do not know how far this would go-on. If there is severe mutual fund redemption pressure coming-up, would RBI increase this Rs 50,000 Crores?. This is a tip of ice-berg.

One should note that Mutual Fund AMCs can take such loans from 27th April to 11th May, 2020. In case of Franklin India Debt funds, since they already closed, they cannot take any such loans as of now. If you have invested in Franklin India debt funds, this would not benefit you as of now. You need to wait for some more time till AMC sells the debt securities to pay back investors.

If you are one among the investor who invested in debt mutual funds and looking for some cash due to covid-19, I would advise you to redeem to some extent. While I would not say there no need to panic, one need to keep a close eye on such debt mutual funds as of now. If you are a low risk taker, then you invested in the wrong investment option and you can exit now.

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Hello Dr Rajendra Kumar, Good to hear about you. Post Franklin India Fiasco, investors are scared to invest / continue in debt funds. I would advice you to think about the risk involved here now. If you are still wish to take risk and continue, you can continue all the funds indicated by you except for corporate bond fund which is high risk.

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